Trade credit insurance on its own is already a powerful risk management tool that dates back to 1820. Traditionally, trade credit insurance policies simply protects big companies in case their buyers don’t pay them, however, it has grown and evolved a lot over the years. One of the recent developments is how trade credit insurance is getting more involved in trade financing.
How this works is that insurance companies provide protection to lenders who finance to suppliers and traders. For example, when a lender finances a transaction of a coconut trader, the financing is usually secured by the payment of the coconut trader’s buyer. Therefore, when the buyer does not pay the coconut trader, the lender becomes very worried if the coconut trader can pay them back.
This is where trade credit insurance comes in. The role of the insurance company here is that it covers the credit and performance risks related to the buyer. In other words, the insurance company compensates the lender when the buyer fails to pay the borrower, if the loss is valid. Of course, this doesn’t answer all risks related to trade finance, therefore, the remaining risks are absorbed by the lender.
Many major banks (such as Rabobank, HSBC, Standard Chartered) already recognize insurance as a proper risk mitigation tool for trade finance. Thus, when lenders find out that a transaction is secured with trade credit insurance, it gives them more confidence to lend to a business. But don’t just take our word for it, read these testimonies below from lenders in the Philippines about how trade credit insurance complements financing:
Investing in Trade Credit Insurance is critical in minimizing risks which in turn allows us to dramatically increase our loan portfolio and serve more clients.– President, Alternative financing company in the Philippines
I’d say the main hurdle for financing companies is trust and transparency. [Trade Credit Insurance] definitely increases trust and transparency and allows us financing companies to better assess the credit risk or each potential borrower– Loan Manager, A finance & private equity group based in the Philippines
Vesl has been integral in assessing and verifying the credit readiness of small businesses, which made our credit scoring faster, seamless and more accurate. Trade credit insurance gives that added security that these businesses are legit and also protected if anything goes wrong. This gives us lenders peace of mind that the transaction will go without a hitch. \– Chief Financial Officer, A fintech company in the Philippines